Coinciding with the "opening red" period for insurance companies, the universal insurance products, which account for a significant portion of the "opening red," are set to face a comprehensive reduction in their settlement interest rates.
On January 9th, it was learned from multiple sources that, according to the latest regulatory guidance, the settlement interest rates for universal insurance accounts from January to May of this year must not exceed 4%, and should be further reduced to 3.8% after June. An informed source revealed that for some larger-scale institutions and risk disposal entities, the rates should be compressed to no more than 3.5%, with additional requirements for companies that have historically underperformed in investment returns.
A representative from an insurance company stated that their announcement regarding the adjustment of universal insurance settlement interest rates is planned to be released by the end of January 2024.
There had been indications of a comprehensive reduction in universal insurance rates. According to an informed source, in December 2023, the relevant regulatory authorities convened a meeting with chief actuaries from the life insurance industry in Xiamen, suggesting that insurance companies should consider the actual and reasonable yield and settlement interest rates for universal and dividend insurance products, in line with changes in the macroeconomic environment and the sustainability of company development. They recommended that insurance companies take action at two time points in early January and early February.
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Prior to the reduction in universal insurance settlement interest rates, adjustments to life insurance products had been ongoing. To cope with the pressure on the investment side of life insurance, regulatory authorities have been promoting two major policies to reduce liability costs: first, reducing the预定 interest rate for insurance products from 3.5% to 3% to guard against interest rate risk; second, using the "consistent reporting and execution" approach to set an upper limit on channel commission fees to prevent fee-related losses.
With the reduction in bank deposit rates and life insurance预定 interest rates, many insurance companies have already lowered the settlement interest rates for their universal insurance products. According to incomplete industry data, as of the end of the third quarter of 2023, the average settlement interest rate for 1,871 universal insurance products was 3.52%, a decrease of 31 basis points from the end of the previous year.
Furthermore, based on the universal insurance settlement interest rates published by insurance companies for October 2023, more than 70% of universal insurance accounts have seen their settlement interest rates reduced to below 4%, with rates generally ranging from 3% to 3.5%. However, according to data from the end of the third quarter, about 6% of products still have settlement interest rates above 4.5%, while the comprehensive investment return rate for the life insurance industry in the first three quarters of 2023 was only 2.7%.
Several industry insiders believe that the current comprehensive investment return rate level can no longer cover the costs on the liability side. The purpose of this reduction in universal insurance settlement interest rates is still to prevent interest rate losses and is one of the regulatory measures to reduce the liability costs in the life insurance industry.
Duan Guosheng, General Manager and CEO of Taikang Asset Management Co., Ltd., recently analyzed at the "2023 Fourth Quarter Insurance Fund Utilization Situation Analysis Meeting" that China's economy is gradually shifting towards high-quality development, and the capital market environment is undergoing new changes. The insurance industry and the insurance asset management industry are facing significant challenges in interest rates, credit, and equity investments, with the difficulty of asset allocation increasing significantly.The changing market environment is a double-edged sword. Duan Guosheng believes that a declining interest rate environment is conducive to the sale of savings-type products, promoting a recovery in the industry's premium income growth rate; while under the pressure of cost-yield matching, regulatory authorities guide the reduction of preset interest rates and promote the "unification of reporting and execution" of channel fees, which also helps to reduce the comprehensive cost of industry liabilities.
Universal insurance rates will be successively adjusted
As an insurance product that allows flexible premium payments, adjustable insurance protection levels, and has both protection and investment functions, universal insurance once achieved brilliant results with a "guaranteed 3%, historical settlement rate of 6%" performance, creating a high premium scale.
With the decline in market interest rates, the development of high-interest universal insurance has increased the operational risks of insurance companies. According to a person in the industry, the regulatory authorities have previously provided several window guidances, limiting the settlement rate of universal accounts to within 5%. Subsequently, starting from August 1, 2023, the regulatory provisions stipulate that the minimum guaranteed interest rate of universal insurance cannot exceed 2%.
In recent years, as market interest rates have gradually decreased, the settlement rates of universal accounts have also started to gradually decrease. This time, the regulatory authorities have once again provided window guidance, requiring insurance companies to limit the settlement rate of universal insurance accounts to no more than 4% from January to May, and further reduce it to 3.8% after June. Some large-scale and risk disposal institutions need to reduce it to no more than 3.5%.
Why does the regulatory authority want to reduce the settlement rate of universal insurance again?
According to Alex, the founder of Actuarial Vision Consulting, the regulatory authorities believe that many universal insurance products with settlement rates of more than 4% in the current market are not only unprofitable for many insurance companies but may also be "paying money" for the company.
Therefore, he also reminds investors that first, the interest rate level of the insurance company's universal account is not fixed; second, when choosing a universal account, it is necessary to observe the insurance company's past investment performance to prevent being "trapped" on the guaranteed interest rate due to the rate of interest decline being too fast.
It is worth noting that the insurance industry is currently in the "opening red" of 2024. During this year's opening red period, insurance companies also follow the previous year's practice of using high-settlement-rate universal accounts to promote the sale of main insurance increased amount lifetime annuities and annuity insurance. Most of these universal accounts have settlement rates that have exceeded the actual bearing capacity of the insurance companies.
According to a person in charge of product aspects of a medium-sized insurance company, among the universal insurance products currently leading the opening red, some large and medium-sized insurance companies still have products with settlement rates of 4.5%, 4.4%, and 4.3%. At the same time, according to an agent of a leading foreign insurance company, if implemented, the company's opening red "annuity + universal insurance account" sales will be affected, and the current settlement rate of the company's universal insurance account is 4.5%.According to statistics from the "13 Jing" database, as of the end of the third quarter of 2023, the average settlement interest rate of the 1,871 universal insurance products included in the market statistics was 3.52% (the average for September), which is a decrease of 31 basis points compared to the end of 2022. Among them, the average settlement interest rate of large insurance companies was 3.80%, and that of medium and small insurance companies was 3.47%.
The data also shows that among the 922 products included in the statistics for December 2023, 85 products had a settlement interest rate exceeding 4%. The highest was the "Xinxiang Yi Two-All Insurance (Universal Type)" from Changsheng Life Insurance, with a monthly settlement rate of 4.65%. Other institutions with universal insurance settlement interest rates exceeding 4% in the month included HSBC Life, Allianz Life, AIA Life, Cathay Life, Dajia Life, Zhonghong Life, Taibao Life, Life Life, China-UK Life, Peking University Founders Life, Ping An Life, PICC Life, China United Life, and Bank of Communications Life. In addition, there were a total of 259 products with a settlement interest rate exceeding 3.8%, and 350 with a rate exceeding 3.5%.
Solving the "interest rate differential loss" risk
As market interest rates decline and investments face pressure, the issue of "interest rate differential loss" has always been a concern in the industry.
The "China Insurance Industry Risk Assessment Report 2023" once pointed out that the transformation of the life insurance industry is still in a critical stage, with a particular mention of the continuous accumulation of interest rate differential risks. In recent years, the central trend of long-term interest rates has been downward, and the rate of decline in the yield on the asset side of life insurance is faster than the pace of cost reduction on the liability side. The interest rate differential has been narrowing year by year, especially the impact of the capital market turmoil in 2022 on the returns of equity assets, which requires more attention to the risk of interest rate differential loss.
Yang Jun, Secretary of the Party Committee and Chairman of the Century Insurance Asset Management, recently stated at the 14th China Financial Development Forum that for insurance funds, the fixed income coupon and a certain duration strategy can basically cover the cost of liabilities. However, in the current macro environment of low growth, low inflation, and loose money, coupled with the possibility of a rebound in short-term interest rates, it has affected the effectiveness of the traditional allocation strategy of insurance funds.
In Yang Jun's view, the low-interest-rate environment has brought great pressure to the allocation of insurance assets. At present, the average asset duration of traditional insurance in China is about 7 years, and the liability duration is about 16 years, with a large duration gap, which amplifies the interest rate differential loss, and most medium and small life insurance companies are facing pressure on business losses.
The level of universal insurance settlement interest rates is closely related to the investment income level of insurance companies. Although the settlement interest rate of universal insurance continues to decline, it is still higher than the annualized return on insurance funds. According to data from the National Financial Regulatory Administration, in the third quarter of 2023, the annualized financial return on insurance funds was 2.92%, and the annualized comprehensive return was 3.28%; in the third quarter, the annualized financial return on life insurance companies was 2.93%, and the annualized comprehensive return was 3.32%.
Looking at the investment performance of listed insurance companies in the first three quarters of 2023, the performance is generally under pressure in the severe investment market environment, and the investment return rate is basically not higher than 4%. The total investment return rates of China Life, Ping An, China Pacific, and New China Life were 2.81%, 3.70%, 2.40%, and 2.30%, respectively.
(Investment performance of the five A-share listed insurance companies in the first three quarters, sorted according to announcements)To address the issue of interest rate differential losses, regulatory authorities have repeatedly employed a "combination punch" approach. On July 31, 2023, the regulatory department, through window guidance, reduced the life insurance companies' 3.5% guaranteed interest rate products to 3.0%; starting from August 1, 2023, the regulation stipulates that the minimum guaranteed interest rate for universal insurance cannot exceed 2%. Previously, the guaranteed interest rates for universal insurance products ranged from 1.75% to 3%, but this does not mean that the industry's interest rate differential risk has disappeared.
A senior executive from a mid-sized insurance company believes that the current macroeconomic environment faces more uncertainty factors, with equity markets experiencing a one-sided decline, bond market yield centers continuously and rapidly decreasing, and a shortage of non-standard assets. "In this environment, insurance companies should have reduced the scale of their liability business, but the entire industry, instead of doing so, rushed to scale up as the 3.5% pricing interest rate was nearing its end, thereby increasing the difficulty of asset allocation, further deteriorating operational conditions, and simultaneously intensifying the risk of interest rate differential losses."
The risk of interest rate differential losses is still fresh in the memory of the insurance industry. The adjustment of the pricing interest rate in 1999 led to substantial losses in the life insurance industry. There are two main reasons for interest rate differential losses: one is the high guaranteed interest rate, and the other is the low investment return. Looking back at the global life insurance market, the United States in the late 1980s and Japan in the late 1990s both faced the issue of interest rate differential losses, with some life insurance companies even going bankrupt. Around the 1970s, the U.S. life insurance industry was highly competitive, and to enhance competitiveness, insurance companies sold a large number of products with high liability costs and low profits.